The SECURE Act Passed – What does it mean for you?

By Michael Saulnier, Director, Retirment Plan Services

On Dec. 20, 2019, President Trump signed a new Act into law that aims to expand and strengthen retirement solutions for workers across the country. This new legislation called the SECURE Act (an acronym for “Setting Every Community Up for Retirement Enhancement”), triggers significant changes for both existing retirement plans as well as companies looking to start a new retirement plan. Many of these new provisions go into effect for plans years beginning after Dec. 31, 2019, so retirement plan sponsors and IRA account holders should pay particularly close attention to these changes and their impact going forward.

At Aprio, it’s always our goal to keep our clients updated on the latest news and regulatory events, so we’ve summarized the most important changes to keep in mind:

Changes for Active Plans

Some of the most notable changes included with the new legislation are those that impact active safe harbor plans, which are 401(k) plans that avoid most annual compliance tests and require an employer contribution. Historically, all plan sponsors were required to give advance notice of their contribution to plan participants. Now, under the SECURE Act, the traditional safe harbor notice applies only to safe harbor match plans. Therefore, plan sponsors that are making qualified 3 percent non-elective contributions to eligible participants are no longer required to give notice to those plan participants for plan years beginning after Dec. 31, 2019.

Additionally, the SECURE Act added new safe harbor provisions for amending a plan to a non-elective safe harbor plan with 3 percent qualified non-elective contributions. Specifically, the Act allows plan sponsors to amend existing 401(k) plans to add a safe harbor non-elective feature after the plan year has already started for all plan years beginning after Dec. 31, 2019. This new allowance comes with a few limitations, however. For instance, the new provision does not allow for amending an existing plan to a matching safe harbor contribution. Furthermore, the new amendment must go into effect at least 30 days before the end of the year, and the plan sponsor must make a 4 percent contribution, rather than the traditional 3 percent, for that initial year.

The SECURE Act also introduced broader changes that impact all 401(k) plans, not just safe harbor plans. First, the Act increased the maximum automatic escalation level for qualified automatic contribution arrangements, raising the cap for deferrals from 10 percent to 15 percent for plan years beginning after Dec. 31, 2019. Additionally, the Act now requires employers to provide dual-eligibility provisions to encourage coverage for permanent part-time employees. Under the new dual-eligibility provision, employers must provide eligibility for employees who work at least 500 hours per year for three consecutive years. These employees must still meet the plan’s age requirement, but the Act does include a provision whereby these employees may be disregarded from annual nondiscrimination testing. The new provision for dual-eligibility applies to plan years beginning after Dec. 31, 2020, and 12-month periods beginning before Jan. 1, 2021 will not be taken into account.

Changes to Other Defined Contribution Plans

The SECURE Act also includes many changes (of varying degrees) to other defined contribution plans beyond just 401(k) plans. Some of the more straightforward changes include the following:

• First, the SECURE Act increased the required minimum age for distributions from 70 ½ to 72 for distributions made after Dec. 31, 2019.
• Additionally, the Act includes a new provision that requires a plan participant’s account to be fully distributed to the non-spouse beneficiaries within 10 years of the participant’s death. (Although there are some exceptions to this provision, such as if the designated beneficiary is a minor child, chronically ill or disabled.) This applies to distributions with respect to employees who die after Dec. 31, 2019
• Furthermore, the Act now allows participants to take penalty-free early withdrawals of up to $5,000 to cover expenses related to the birth or adoption of a child. This withdrawal can optionally be repaid at any time and applies to distributions made after Dec. 31, 2019.

In addition to these updates, the SECURE Act also introduced more complex changes that will require additional guidance or, at the minimum, more careful implementation. For instance, the Act creates new allowances for a Pooled Employer Plan (PEP), which is a type of Multiple Employer Plan with more relaxed rules. This effectively expands the ability for employers to create jointly defined contribution plans to reduce cost by eliminating several past limitations, including the requirement to have an organization or employment-based relationship. However, the initial impacts of this change are very complex and the provision will only go into effect for plan years beginning after Dec. 31, 2020, so Aprio recommends awaiting further guidance before pursuing this new type of plan.

Further, the SECURE Act introduces three new provisions aiming to encourage lifetime income options for defined contribution plans. Specifically, these new provisions are related to fiduciary safe harbors for selecting lifetime annuity options, as well as required disclosures and portability. The first provision requires annual participant statements to include the annuity equivalent of the plan participant’s account calculated using assumptions developed by the U.S. Department of Labor. The second provision requires plan fiduciaries to select an annuity provider that provides guaranteed lifetime income under a plan. And finally, the third provision allows for direct rollovers to an IRA or other retirement plans with lifetime annuity investment options. These new provisions don’t yet have an effective date, so Aprio recommends awaiting further guidance on these new changes as well.

Changes to Startup Plans

Other noteworthy changes triggered by the SECURE Act have a large impact on startup plans, including efforts by plan sponsors to establish a new plan. Specifically, the Act establishes that employers now have until the due date of the company’s tax return (with extensions) to establish a new Profit-Sharing, Cash Balance, or Defined Benefit Plan for the year. In other words, plan sponsors can now establish a new plan after Dec. 31 (depending on the due date of the tax return), whereas previous law required adoption before the end of the calendar year. This new provision applies to plans adopted for tax years beginning after Dec. 31, 2019.

Additionally, the SECURE Act introduces significant changes to the tax credits available to plan sponsors. For example, new plans now qualify for tax credits equal to $250 per eligible non-highly compensated employee. The tax credit is subject to a minimum credit of $500 and a maximum credit of $5,000, which is 10x the previous cap of $500. While there are a few other stipulations to qualifying for and receiving this credit, plan sponsors can also pursue an auto-enrollment credit of $500 per year for the first three years that a plan includes an automatic enrollment provision. These changes to tax credits go into effect for tax years beginning after Dec. 31, 2019.

Changes to Penalties

It’s important also to note that the SECURE Act significantly increases the penalties associated with failing to file some plan-related returns, most notably including Form 5500 and Form 8955-SSA. For the former, the IRS penalty for late filing increased from $25 per day to $250 per day with a maximum annual penalty of $150,000 (10x the previous maximum annual penalty). For the latter, the IRS penalty for late filing is increased from $1 per participant to $10 per participant per day, up to a maximum of $50,000. These new penalties apply to returns due after Dec. 31, 2019.

With such widespread and significant changes to the requirements, credits and penalties associated with retirement plans, it is critical that any company currently offering existing plans or looking to start a new plan be thoroughly educated on compliance with the new SECURE Act. But companies and plan sponsors should not be expected to interpret these new tax laws on their own. As always, Aprio Retirement Plan Services is here to help you fully understand all of the changes and how they relate to your business. Please contact Michael Saulnier with any questions. 770-353-5908 or michael.saulnier@aprio.com.